Georgetown University Direct vs. Indirect Costs And Allowability on Federal Awards

Georgetown University Direct vs. Indirect Costs And Allowability on Federal Awards Cost Analysis and Compliance http://www.georgetown.edu/finaff/sao/cost/cost.htm Contacts: Jim Reisert, Director, Cost and Sponsored Accounting, JLR23@georgetown.edu Robert Layser, Manager, Cost Analysis and Compliance, layserr@georgetown.edu OMB A-21 - http://www.whitehouse.gov/omb/circulars/a021/a021.html NIH Website http://grants.nih.gov/grants/policy/ 1

Table of Contents I. FAQ Frequently Asked Questions Allowable Charges II. Definitions III. Accounting and identification of unallowable costs IV. OMB Circular A-21 V. OMB Circular A-21 Section J Allowable and Unallowable Costs VI. Unallowable Costs Federal and Private Awards VII. Cost Transfer Policy VIII. Facilities and Administrative Costs (F&A) I. FAQ Allowable Charges Q1. Am I allowed to purchase personal items for myself, family, friends, vendors, or anyone else? A1. No. You can only purchase products and services used and consumed in the normal course of the University s operations. Personnel action can and will be taken by the University against anyone using the procurement system for personal gain. Q2. May I buy office supplies (pens, pencils, paper, etc.) and charge to a sponsored program? A2. The Principal Investigator (PI) is the individual responsible for determining what may or may not be charged to his or her programs as a direct charge. Generally supplies of this nature may not be charged directly to a sponsored program and should be charged to the department responsible for the sponsored program. If you are not the responsible PI, ask the PI before you make the purchase and request written authorization from the PI. Office supplies are considered part of overhead and should not be charged as direct expenses. Exceptions should be discussed with OSP, OSR or SAO. Q3. My ProCard has a dollar limit of $2,499 per purchase item but I want to buy a computer system that costs $2,510 (including shipping and handling). May I request that the vendor charge the shipping and handling as a separate purchase from the computer system? A3. No. A computer system (including monitor, CPU, keyboard, mouse, and factory installed operating system software) is considered as one unit or a bundle. All costs associated with a bundled purchase costing an amount equal to or more than $5,000 must be capitalized and subjected to inventory and depreciation. However, if the bundle included accessory items such as a printer, or a separately priced software program, such as WordPerfect, then you may have the total cost broken down into the components. For example: 2

Computer System $2,250 WordPerfect Software 220 Shipping and handling 40 Total $2,510 The above example would not be considered a bundle purchase, because GU does not capitalize add-on software. In this case you have a computer system that cost $2,290, and a software program costing $220. The computer would be recorded as in the account titled Computer Equipment less than $2,500 and the software would be recorded to the account for software expense. The same scenario would apply to office furniture, lab equipment or supplies. NOTE: If the purchase is over $2,500, it may still be charged to the grant, if applicable, but not charged on the ProCard. Office furniture should be treated as a direct charge. If office furniture is specifically stated in the award and is over $5,000, it must be inventoried. Q4. A PI is purchasing a new centrifuge for her lab that will be shared with other PIs working on various projects. Can the centrifuge be charged to one Federal grant? A4. The PI should request permission from the sponsor prior to charging to the grant. If the PI has several grants and wants to charge the equipment to one grant, permission should be sought from the sponsor as well. Q5. My budget does not specifically have a category for professional memberships. Can I charge the membership directly to my NCI (National Cancer Institute), NSF (National Science Foundation) or NIH (National Institutes of Health) award? A5. No. Memberships cannot be specifically identified to single project. Since the memberships are organizationally supported, this cost is considered to be an F&A (indirect) related expense. Q6. The researchers in our lab have monthly progress meetings to discuss their research and lunch is provided. Can I charge this directly to my NIH grant? A6. No. This type of activity would be perceived as a "social activity" and would be considered an unallowable cost. Social activities are listed as an "Entertainment Cost" in the NIH grants policy statement. Q7. How do you determine who has access to the indirect cost pool generated from sponsored awards? A7. The campus finance offices determine guidelines for indirect cost recovery use. You should contact your CFO for additional information. Q8. Does this policy apply to all sponsored awards? 3

A8. No. There are different policies for different sponsors. You should refer to the NOGA for specific information. II. DEFINITIONS A. Allowable Costs From OMB Circular A-21, Section C.2. The tests of allowability of costs under these principles are: (a) they must be reasonable; (b) they must be allocable to sponsored agreements; (c) they must be given consistent treatment through application of those generally accepted accounting principles appropriate to the circumstances; and (d) they must conform to any limitations or exclusions set forth in these principles or in the sponsored agreement as to types or amounts of cost items. Reasonable Cost Test A cost is considered reasonable if it is incurred as the result of the actions a prudent person would have taken under circumstances prevailing at the time. That is, a reasonable cost is one generally recognized as necessary for the operation of the institution or the performance of the sponsored agreement, and is consistent with established institutional policies and practices applicable to the work of the institution generally, including sponsored agreements. Allocable Cost Test From OMB Circular A-21, Section C.4.a. A cost is allocable to a sponsored agreement if (1) it is incurred solely to advance the work under the sponsored agreement; (2) it benefits both the sponsored agreement and other work of the institution, in proportions that can be approximated through the use of reasonable methods; or (3) it is necessary to the overall operation of the institution and, in light of the principles provided in this Circular, is deemed to be assigned in part to sponsored projects. B. Unallowable Costs From CAS 505: Unallowable cost means any cost which, under the provisions of any pertinent law, regulation, or sponsored agreement, cannot be included in prices, cost reimbursements, or settlements under a Government sponsored agreement... Any cost directly associated with an unallowable cost is unallowable as well. From CAS 505: Directly associated cost means any cost which is generated solely as a result of the incurrence of another cost, and which would not have been incurred had the other cost not been incurred. Note: A cost may be allowable for the University but unallowable in terms of reimbursement from the Federal government. These costs may be entirely appropriate and permissible in carrying out University activities. C. Direct Costs From OMB Circular A-21, Section D.1: Direct costs are those costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy. Costs incurred for the same purpose in like circumstances must be 4

treated consistently as either direct or indirect costs. Where an Institution treats a particular type of cost as a direct cost of sponsored agreements, all costs incurred for the same purpose in like circumstances shall be treated as direct costs of all activities of the institution. D. F&A (Indirect Costs) From OMB Circular A-21, Section E.1: Facilities and Administrative (F&A) costs are those that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project, an instructional activity, or any other institutional activity. Indirect costs are the facilities infrastructure and administrative costs of the University that are needed to support the programs of the institution, including research and other sponsored programs. Building depreciation, maintenance costs, the cost of utilities, personnel services, accounting and budgeting services, sponsored program services, student services, departmental administration, and human subjects administration are examples of F&A costs. III. Accounting and identification of unallowable costs Unallowable costs must be charged to specific account codes in the University s accounting system. The costs recorded in these account codes are excluded from the direct and indirect costs charged to sponsored agreements. Additionally, costs incurred by organizational units whose overall functions and activities are unallowable (e.g., University Development, Alumni Relations, Office of Federal Relations) are identified by the accounting system at the department or account level and removed from the indirect cost pools allocated to sponsored agreements. A list of specific revenue and expense accounts can be found at: http://www.georgetown.edu/finaff/coa/coa.html IV. OMB Circular A-21 http://www.whitehouse.gov/omb/circulars/a021/a21_2004.html OMB A-21 - Cost Principles for Educational Institutions. OMB Circular A-21 establishes principles for determining costs applicable to Federal grants, contracts, and other sponsored agreements with educational institutions i.e., unallowable costs are not to be charged to federal grants, such as alcohol, alumni activities, bad debts, charitable donations, lobbying, etc. Purpose. This Circular establishes principles for determining costs applicable to grants, contracts, and other agreements with educational institutions. The principles deal with the subject of cost determination, and make no attempt to identify the circumstances or dictate the extent of agency and institutional participation in the financing of a particular project. The principles are designed to provide that the federal government bear its fair share of total costs, determined in accordance with generally accepted accounting principles, except where restricted or prohibited by law. Agencies are not expected to place additional restrictions on individual items of cost. Provision for profit or other increment above cost is outside the scope of this Circular. 5

It is important that special care should be exercised to ensure that costs incurred for the same purpose in like circumstances are treated consistently as either direct or F&A costs. For example, salaries of technical staff, laboratory supplies (e.g., chemicals), telephone toll charges, animals, animal care costs, computer costs, travel costs, and specialized shop costs shall be treated as direct cost wherever identifiable to a particular cost objective. Direct charging of these costs may be accomplished through specific identification of individual costs to benefiting cost objectives, or through recharge centers or specialized service facilities, as appropriate under the circumstances. The salaries of administrative and clerical staff should normally be treated as F&A costs. Items such as office supplies, postage, local telephone costs, and memberships shall normally be treated as F&A costs and therefore are not charged as direct expenses. Section J, OMB A-21. General provisions for selected items of cost. Anyone conducting research must become familiar with section J of OMB Circular A-21. It provides 50 principles to be applied in establishing the allowability of certain items that are involved in determining cost. These principles should apply irrespective of whether a particular item of cost is properly treated as direct cost or F&A cost. Failure to mention a particular item of cost is not intended to imply that it is either allowable or unallowable; rather, determination as to allowability in each case should be based on the treatment provided for similar or related items of cost. In case of a discrepancy between the provisions of a specific sponsored agreement and the provisions below, the agreement should govern. Refer to section J for the complete text. V. OMB Circular A-21 Section J Allowable and Unallowable Costs. Section J of A-21 spells out the allowable and unallowable costs and exceptions. J.1. J.2. J.3. J.4. J.5. J.6. J.7. J.8. J.9. ADVERTISING AND PUBLIC RELATIONS Allowable only if related to and necessary for performance of the project (i.e., disposal of surplus materials) or advertising for a position. ADVISORY COUNCILS Allowable as a direct cost where authorized by awarding agency; otherwise as an indirect cost. ALCOHOLIC BEVERAGES Unallowable ALUMNI ACTIVITIES Unallowable AUDIT COSTS AND RELATED ACTIVITIES Allowable as a direct cost when approved by the awarding agency; otherwise as an indirect cost. BAD DEBTS -- Unallowable BONDING COSTS Allowable pursuant to the terms of an award. COMMENCEMENT COSTS Unallowable COMMUNICATION COSTS Allowable as a direct cost for items such as long distance calls related to a project); otherwise an indirect cost for items such as recurring line charges, non-project long- distance calls) J.10. COMPENSATION FOR PERSONAL SERVICES Allowable (note: sabbatical leave is now covered under this section as well as fringe benefits, pension plans, institution-furnished vehicles and severance pay. J.11. CONTINGENCY PROVISIONS Unallowable except for self-insurance, pensions, severance and post-retirement health costs. 6

J.12. DEANS OF FACULTY AND GRADUATE SCHOOLS Allowable as indirect J.13. DEFENSE AND PROSECUTION OF CRIMINAL AND CIVIL PROCEEDINGS, CLAIMS, APPEALS AND PATENT INFRINGEMENT Allowable, unless commenced by the federal, state or local government J.14. DEPRECIATION AND USE ALLOWANCES Allowable as an indirect cost J.15. DONATIONS AND CONTRIBUTIONS Unallowable J.16. EMPLOYEE MORALE, HEALTH, WELFARE COSTS Allowable as indirect J.17. ENTERTAINMENT COSTS Unallowable J.18. EQUIPMENT AND OTHER CAPITAL EXPENDITURES Allowable J.19. FINES AND PENALTIES Unallowable J.20. FUND RAISING AND INVESTMENT COSTS Unallowable except where incurred as a result of compliance with a sponsored agreement or written prior authorization by sponsoring agency. J.21. GAINS AND LOSSES ON DEPRECIABLE ASSETS Allowable as a credit or charge in the year of the property s sale, retirement or disposal. J.22. GOODS OR SERVICES FOR PERSONAL USE Unallowable J.23. HOUSING AND PERSONAL LIVING EXPENSES Unallowable J.24. IDLE FACILITIES AND IDLE CAPACITY Idle facility is unallowable; idle capacity is allowable as an indirect cost if reasonable J.25. INSURANCE AND INDEMNIFICATION Allowable if needed for a sponsored agreement (note: malpractice insurance is allowable cost of research programs only to the extent that the research involves human subjects) J.26. INTEREST Unallowable, except for interest on debt incurred after 7/1/82 to acquire buildings, major reconstruction and remodeling, or acquisition/fabrication of capital equipment costing $10,000 or more J.27. LABOR RELATIONS COSTS Allowable J.28. LOBBYING Unallowable J.29. LOSSES ON OTHER SPONSORED AGREEMENTS OR CONTRACTS Unallowable J.30. MAINTENANCE AND REPAIR COSTS Allowable J.31. MATERIAL AND SUPPLIES COSTS Allowable as a direct cost along as necessary to carry out a sponsored agreement and actually used for the performance of a sponsored agreement J.32. MEETINGS AND CONFERENCES Allowable J.33. MEMBERSHIPS, SUBSCRIPTIONS AND PROFESSIONAL ACTIVITY COSTS Allowable, except for membership in civic/community, country club, social or dining clubs are unallowable J.34. PATENT COSTS Allowable if required by the sponsored agreement, except for foreign patents J.35. PLANT AND HOMELAND SECURITY COSTS -- Allowable J.36. PREAGREEMENT COSTS Unallowable unless approved by the sponsoring agency J.37. PROFESSIONAL SERVICE COSTS Allowable J.38. PROPOSAL COSTS Unallowable 7

J.39. PUBLICATION AND PRINTING COSTS Allowable as a direct cost if the costs can be identified with a research project, and if the cost is page charges, the charges are levied impartially on all research papers published, not just those funded by federally sponsored authors J.40. REARRANGEMENT AND ALTERATION COSTS Allowable, with prior approval of the sponsoring agency J.41. RECONVERSION COSTS Allowable J.42. RECRUITING COSTS Allowable if reasonable (color ads are not considered reasonable) J.43. RENTAL COSTS OF BUILDINGS AND EQUIPMENT Allowable J.44. ROYALTIES AND OTHER COSTS FOR USE OF PATENTS Allowable if necessary for the performance of an award J.45. SCHOLARSHIPS AND STUDENT AID COSTS Allowable only when the purpose of the sponsored agreement is to provide training to selected participants and the charge is approved by the sponsored agency J.46. SELLING AND MARKETING Unallowable J.47. SPECIALIZED SERVICE FACILITIES Allowable, but rates must be adjusted at least biennially and have to take over/under applied costs of the previous period(s) into consideration J.48. STUDENT ACTIVITY COSTS Unallowable J.49. TAXES Allowable when the institution is required to pay J.50. TERMINATION COSTS APPLICABLE TO SPONSORED AGREEMENTS Allowable if for a sponsored project J.51. TRAINING COSTS Allowable, as indirect J.52. TRANSPORTATION COSTS Allowable J.53. TRAVEL COSTS Allowable, but must be reasonable (must be lowest commercial airfare coach or equivalent) J.54. TRUSTEES Allowable, as indirect VI. Unallowable Costs Federal and Private Awards This policy defines Unallowable Costs in regards to federally funded sponsored awards. The University receives privately sponsored Awards that also have defined unallowable costs. For this reason, Department Administrators and PIs should always carefully review the Notice of Grant Award terms that are usually sent with the Award letter. If Award Terms and Conditions are not sent to the PI with the Award letter, private sponsors have web sites with beneficial information available. An example of a private sponsor that has defined unallowable costs is the American Heart Association. American Heart Association does not allow their awarded grants funds to be spent on books, office supplies, malpractice premiums, expenses in obtaining a VISA and memberships. National Kidney Foundation and American Cancer Society have similar definitions of unallowable costs. 8

VII. Cost Transfer Policy http://www.georgetown.edu/finaff/sao/policies_procedures/costxfer.pdf Payroll Voucher and Cost transfer JV forms are required when any costs (expenses) are transferred to or from any RX cost center. The cost transfer policy is mandated by the Office of Management and Budget s Circular A-110. For this reason, the Sponsored Accounting Office reviews cost transfer JVs to be certain they are in compliance with A- 110. Additionally, some departments may submit a cost transfer JV which impacts a RX account that is in another department. University policy requires the signatures of all parties affected by a cost transfer, i.e. the preparer, departmental administrator or Principal Investigator, and Sr. Business Manager as appropriate. It is not acceptable to charge another department for a supply or service for which that department and/or PI is not aware. VIII. Facilities and Administrative Costs (F&A) (formerly Indirect Costs) The F&A process is the development of an overhead rate for the University. It is by no means a clear cut process and involves not only the financial information reported on the institution s financial statements but such other information as: Space and how the institution is using that space. Utilities and information concerning who, what, when, and where it is being consumed. Does the institution own/rent (or both) the facilities it uses. Does the institution have an accounting system that is reliable and can support any finding during the F&A development Does the institution have the willingness to develop information necessary to support the F&A. F&A and Fringe rates negotiated with DHHS See Rate Agreements 9